Question

Exercise 4-1 (Video) Saddle Inc. has two types of handbags: standard and custom. The costing and wants to see how the results would differ if this company's operations controller has decided to use a plantwide overhead rate based on direct labor costs. The president has heard of system were used. Two activity cost pools were developed: machining and machine setup. Presented below is information related to the Standard Custom Direct labor costs Machine hours Setup hours $50,000 100,000 1,200 420 1,200 90 Total estimated overhead costs are $299,100. Overhead cost allocated to the machining activity cost pool is $192,000, and $107,100 is allocated to the machine setup activity cost pool Compute the overhead rate using the traditional (plantwide) approach. (Round answer to 2 decimal places, e9. 12.25.) Predetermined overhead rate % of direct labor cost Compute the overhead rates using the activity-based costing approach. Machining per machine hour Machine setup per setup hour

Answer 1

(i)

Total estimated overhead costs = $299,100

Total direct labor costs = $150,000

Predetermined overhead rate = Total estimated overhead costs/Total direct labor costs

= 299,100/150,000

= 199.4%

(ii)

Overhead rates using Activity based costing approach

Machining = Overhead cost allocated to machining activity cost pool/Number of machine hours

= 192,000/2,400

= $80 per machine hour

Machine set up = Overhead cost allocated to set up activity cost pool/Number of set up hours

= 107,100/510

= $210 per set up hour

(iii)

Difference in allocation between two approaches

Traditional costing

Standard = 50,000 x 199.4%

= $99,700

Custom = 100,000 x 199.4%

= $199,400

Activity based costing

Standard = 1,200 x 80 + 90 x 210

= 96,000 + 18,900

= $114,900

Custom = 1,200 x 80 + 420 x 210

= 96,000 + 88,200

= $184,200

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